Cover Story.

Charge Of The Rebate Brigade

Affinity Card Offers Abound, But Are They Too Big A Gamble?

Evanston resident John Frank may carry a leather wallet, but it's full of plastic.

Frank owns three Visas, one MasterCard, a Discover card and an American Express card. Each offers enticing incentives to lure him to spend his hard-earned cash.

The General Motors MasterCard rewards him with a rebate good toward the purchase of a GM car or truck; the Northwestern University Visa donates a portion of his spendings to the university; and Discover gives him a cash-back rebate of one-fourth to 1 percent of his yearly purchases.

An increasing number of companies such as General Motors, General Electric, Ameritech, United Airlines and H&R Block are teaming with banks to offer credit cards in an effort to gain consumer dollars and sell their products.

"The danger is spending like a madman, but I'm trying not to do that," Frank says. But the rewards, such as Discover's cash-back rebate, appeal to him.

"If I'm going to buy a big-ticket item and a store takes Discover, I'll use Discover," he said. "I haven't gotten back more than $3 or $4 a year, but it still feels good to get that."

While some credit cards provide rebates, they also can have hidden costs such as high annual fees and steep annual percentage rates, says Ruth Susswein, assistant director of Bankcard Holders of America, a non-profit consumer group that tracks the credit card industry.

"Our big concern is that people should remember that these are rebate dollars, not actual dollars you get in cash," Susswein says. "They can be a terrific way to rack up savings if you are going to use the rebate. If you don't use the rebate, then you're usually better off getting a low interest-rate card."

Compare the Ford MasterCard and Visa to the low-interest Wachovia card. The Ford card has a 15.4 percent variable interest rate and a $20 annual fee that's waived the first year. When you use the card, you earn a rebate equal to 5 percent of your purchases, with a limit of $700 per year for five years, that can be applied toward the purchase of a Ford, Lincoln or Mercury car or light truck.

If you charge $2,200 a year on the Ford card and pay interest on a revolving balance of $1,100, you would pay finance charges of $169.40.

In contrast, the Wachovia card has an 8.9 percent annual percentage rate. If you charge the same amount, your finance charges would be $97.90, plus a $39 annual fee.

Ford's finance charges are higher, but you would earn a $110 rebate toward the purchase of a Ford car or truck. If you do not plan to buy a Ford car, then you would be better off with Wachovia. But if you use the rebate, the Ford card makes sense. Also, if you pay your bill in full each month, as John Frank does, and don't incur any finance charges, then the rebate comes at no cost to you.

Business is booming for co-branded cards, which are offered by large corporations, and affinity cards, which benefit organizations such as universities or non-profit groups. In 1992, co-branded and affinity cards accounted for 26 percent of 99.5 million MasterCards. In 1988, co-branded and affinity cards accounted for only 8 percent of MasterCard's 82.4 million cards.

"Companies have figured out that they can use credit cards to sell their own product," says James Daly, editor of Credit Card News, a Chicago-based trade magazine.

GM has been extraordinarily successful with its MasterCard, launched in September 1992. Already, more than 7 million people carry the GM card, and more than 45,000 customers purchased cars using the rebates, says Ron Zebeck, managing director of GM card operations.

Several years ago, airlines found that by combining frequent-flier programs with credit card offers, they could increase customer loyalty. Customers use the charge cards to accumulate miles for a free plane ticket.

"It really enables them (frequent fliers) to earn faster rewards, and it further encourages them to fly on United," says James M. Guyette, executive vice president of marketing and planning for United Airlines, which started its Mileage Plus First Card Visa in 1987.

"If you use a department store credit card, what value is there to you? At least with these co-branded or affinity cards there's some value."

But, again, that value can come at a cost. Generally, you must be a big spender to receive the maximum benefit. Most airlines require you to earn 20,000 miles for a free ticket. Every dollar you charge is worth one mile. So to earn a ticket using a credit card, you must charge $20,000 worth of merchandise. A typical consumer would take about 10 years to receive a free ticket. During that time, it's possible to rack up huge finance charges.

Promises of new cars, refrigerators or trips to Florida are alluring. But consider your spending habits before plunking down the plastic. If you pay hefty finance charges, a small discount won't save you money. Likewise, if you never use the rebate, it's worthless. However, those who pay their bills in full each month may find co-branded credit cards a worthwhile option.